Abstract:

Gray marketing emerges when gray marketers stealthily resell a branded product without themanufacturer's authorization. Previous research has examined the influence of the gray market on the manufacturer's channel selection strategy， but therelacks of research on how retailer choose channelbased on gray market condition. In this paper， based on the background of gray market， a supply chain system consisting of a retailer， a manufacturer is studied， in which the retailer is the leader and need to choose among three possible channel structures： A local gray market channel， where a retailer diverts products to unauthorizedsellers operating in the same region as the retailer， a multinational gray market channels， where the retailer diverts products to unauthorized sellers in another market where the manufacturer sells through a directchannel， and dual channel. A supply chain model considering the difference in unit service cost between gray channel and authorized channel is built. The equilibrium in each type of gray market is characterized and conditions under which the retailer will divert products to the gray market are identified. It is shown that characteristic of the industry where the gray market trade is booming. Furthermore， the retailer’s optimal profits are compared and it is found that the retailers' optimal channel structure selection strategy. Interestingly， it is also found that the firms benefit from the retailer’s diversion to a gray market when service cost and brand loyalty is large. It is also found that when the service cost is high， the retailer should choose the multinational gray market channel； when the service cost is moderate， the retailer should choose the local gray market channel；when the service cost is small， the dual channel gray market structure is the best choice.

Key words: supply chain, gray market, channel selection, Stackelberg game